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Contributed by Bill Bonner
Publisher of: The Fleet Street Letter

FRIDAY, 21 JULY 2000 


Today:  Dot.Com Dollar

In Today's Daily Reckoning:

*** Today just happens to be Mr. Paul Reuter's birthday. 
So, I will begin this installment of the Daily Reckoning 
with a headline from the news service he began more than 
a century ago:

"Stocks Soar on Tech News, Greenspan Cheer"

*** The tech news to which Mr. Reuter's employees refer 
was an increase in IBM earnings. Sales have gone down at 
Big Blue for 3 quarters in a row, but profits went up. So 
investors were excited and bid up the stock - lifting the 
Dow substantially.

*** Mr. Greenspan's cheer, meanwhile, came from his 
Congressional testimony, in which the Fed chief said he 
saw no decline in productivity and from which analysts 
concluded that he was not likely to hike rates again next 

*** On the strength of these two inconsequential bits of 
information investors drove the Dow up 147 points - 
leaving it above its most recent rally peak...and further 
confusing the bear market outlook.

*** The Nasdaq responded positively too - rising 128 
points, leaving it in the black for the 2.83%.

*** The summer fun was widely shared. 1698 stocks 
advanced on the NYSE. Only 1138 fell. 69 hit new highs. 
Only 47 hit new lows.

*** Bonds rose too - the bond vigilantes have decided to 
stop worrying and join the fun. 

*** And gold rose a little, up 80 cents. Platinum rose 

*** Last, and perhaps most important, the dollar bucked 
the trend and fell. I thought the dollar had topped out 
back in the middle of May. The dollar index hit 112.08 on 
May 17 and then fell to 105.12 on June 8. Since then it 
has been coming back, reaching 109.65 two days ago and 
threatening to put in a new top. But yesterday, it fell 
back...confirming, at least for the present, that the 
dollar has joined what Richard Russell calls "the Top Out 

*** Marc Faber notes that, in this market, even stable 
'old economy' companies are getting tossed about like a 
peanut at sea. "Procter and Gamble, for example," says 
Faber "was rising rapidly and reached a high of US$118. 
Just six months later, its stock price has been halved. 
And Circuit City: in mid-May of this year, its stock 
fetched US $64; then, barely a month later, it had fallen 
to US$35. Or consider Office Depot: it reached a high of 
US$26 last summer. Then it slid to around US$10, and 
although it recovered to US$15 in mid-April. It is now at 
(see: I Know that I Don't Know... Socrates 470-399 B.C.

*** "Northrop Grumman isn't grouped among the high-tech 
stocks or listed on Nasdaq. But its as high-tech as it 
gets." says the Fleet Street Letter's Lynn Carpenter. 
"With a P/E of 8.7, price to earning growth ratio of 0.8 
and price to sales of 0.42, it's obviously worth looking 
into. I did, and it didn't surprise me a bit that 
Northrop has brought our Fleet Street readers a fine 27% 
return in three months." 
(see: The Best Tech Stock in the World-Isn't A Tech Stock

*** I asked Lynn what she thought of the tobacco 
companies in the wake of the Engle decision:

"A contrarian and a value investor has to love the 
smokers," she replied. "But Camel or Marlboro? Phillip 
Morris, the Marlboro Man-ufacturer, is a bargain at P/E
7.3, P/S 0.68 and is going for half its earnings growth 
rate. But if you really want to be contrarian, take a 
look at RJR's Camel-cade." {Lynn, a linguist in an 
earlier career, loves to play with words.) "RJR has [an 
even lower P/E] and a not-too pricey price to earnings 
growth ratio of 1.3," she continued. "They both
pay hefty dividends, too...7.9% for MO and 11.4% for 

"But what I like best is that extremely rare thing...both 
have sell ratings from some analysts. One more thing: 
Insiders are buying RJR heavily and steadily."
(see: The 3 Best Stocks on Wall Street

*** The tobacco companies are pretty darned cheap. Here 
are some more cheap stocks, companies that have the 
misfortune of being traded in Bangkok rather than New 
York - courtesy Doug Barnett of Quest Management, by way 
of Marc Faber. 

"When it comes to compelling investment opportunities," 
writes Mr. Barnett, "Thailand...has no equal." Foreign 
investors have pulled out of the market - leaving prices 
at levels resembling US cigarette makers. 

*** KCE Electronics, for example, is one of the 100 top 
PCB manufacturers in the world. Net profit is expected to 
increase at almost 30% this year. The pretty darned cheap 
stock is available at only 6.2 times earnings. 

*** Regional Container Lines is a market leader trading 
at 5 times enterprise value and only 2 times earnings. It 
is not a tiny company, but one that has thousands of 
ships and containers and an annual profit of about $70 
million in the current year.

*** Or how about this - a company selling at 78% discount 
to net book value...the 38th largest stock in Thailand. 
Banpu is in the power generation business. Shares are 
trading hands at less than 20 Thai baht each. But, 
according to Barnet, "Banpu should convert non-core 
assets into nearly 5 billion [Thai baht] of cash, or 
nearly 24 [THB] per share. 

*** The Pizza Company owns and operates over 280 fast-
food restaurants in Thailand. Earnings have grown at 21% 
year over year, and are expected to continue growing at 
more than 25% for the next 4 years. Barnett forecasts 
that EPS will grow 29% this year. But the stock is 
trading at only 5.8 times earnings.

*** Today is the first day of Thermidor, according to the 
calendar of the French Revolution. The Jacobins, rational 
to a fault, created a perfectly logical - and totally 
absurd - new calendar, which was rejected as soon as the 
revolutionaries were tossed out. Today is also the 
hottest day of the year, in the Northern Hemisphere, 
according to meteorologists. 

*** But here at my new office, on the corner of Rue des 
Lombards and Rue St. Martin...with the bells of St. Merry 
ringing in the is not hot at all. It is 
pleasantly warm, under a clear blue sky. 

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"[W]hat the United States owes to foreign countries it 
pays - at least in part - with dollars that it can simply 
issue if it wants to." 

Charles de Gaulle,
President of France

Gold, as we all know, is believed to be defunct. It has 
been tossed on the scrap heap of monetary history...along 
with notes issued by the Bank of Howardsville, Virginia, 
and the Confederate dollar...neither of which could 
compete with the stronger, better-positioned U.S. dollar.

Gold has been made unnecessary, we are told, by the "just 
in time," zero inventory policies of ATM-connected 
households. People who don't save dollars certainly see 
no reason to save gold. And its job as a back brace for 
central bankers has been eliminated. The work of 
disciplining the currency markets is done today by bond 
vigilantes and the market itself. With inflation-adjusted 
treasury bonds, for example, which pay only slight less 
interest than a non-adjusted bond, who needs gold?

Never since the Middle Ages have people had so much faith 
in something they couldn't see. Then, it was the power of 
the Almighty God, whose works were both mysterious as 
well as omnipresent. Today, it is the almighty dollar - 
manifested more often in strings of digital code than 
actual pieces of paper. 

Faith in "the system" must be at an epic high. A family 
in Duluth, with no savings of any sort, is so confident 
that its needs will be met that it lays in no supplies... 
neither food, water, heat - nor a medium of exchange with 
which to buy these things. Instead, the head of the house 
is sure that when she goes to the nearest ATM 
machine...or uses one of her 13 credit cards...the 
programmers and clerks that tend to these things will not 
let her down.

A year ago, this confidence was put to the test. Computer 
nerds remembered that they had failed to allow for the 
biggest numerical change in the Gregorian calendar in 
1,000 years...when 1999 turned into the year 2000. 
Programmers, IT engineers, professional alarmists, and 
our own Gary North warned that if the problem were not 
corrected in time (and there was widespread doubt that it 
could be) the entire system could collapse.

Whether by expensive intervention or cheap dumb luck this 
did not happen. The present year was rung in without so 
much as a single ATM machine in Tajikistan reporting a 
failure. This, of course, has confirmed the impression 
that the system is invulnerable.

The system in which people seem to have most faith is the 
Federal Reserve one. Custodian of the dollar, and 
helmsman of the world's largest floating economy, the Fed 
has reached a level of public confidence only surpassed, 
perhaps, by Biblical figures. In fact, I have it from one 
of my usually unreliable sources that they no longer 
serve fine wines at meetings of Fed officials. They serve 
water, and Alan Greenspan turns it into wine.

"That makes two leaps of faith by our count," writes Jim 
Grant, still keeping his eye on those interest rates, 
"the first being the universal acceptance as money of the 
slips of paper designated 'legal tender for all debts, 
public and private,' or words to that effect. Not only do 
people accept, indeed covet, this intrinsically worthless 
medium of exchange convertible into nothing except other 
units of legal tender, but they also trust implicitly the 
public servants who manage it."

You may have guessed from the title to today's letter, 
however, that not everyone participates in Fed-worship. 
On the question of Greenspan's divinity, there are a 
still a few un-believers amongst us.

"What is really sustaining bullish sentiment about the 
U.S. stock market and, propping up the dollar," asks Dr. 
Kurt Richebacher, a longtime agnostic on the Fed 
chairman, "When asked, everybody pulls the same trump 
card: Faith in the economy's superior qualities, and 
faith in the unique wisdom of Mr. Greenspan. His name 
stands for two tacit presumptions: first, that any signs 
of undesired economic weakness will prompt the Fed to 
instant rate cuts; and second, that the U.S. economy and 
the financial markets will just as promptly respond to 
any monetary easing."

"There is no doubt," Dr. Richebacher continues, "that he 
will instantly fight any threat of recession by 
immediately cutting rates and loosening his credit reins. 
In reality, he will face the catch-22 situation of his incalculable risk on the grossly overvalued 
dollar... The U.S. currency is vulnerable to any slight 
shift in market perception and psychology as never 
before." (see: Don't Worry, Mr. Greenspan Will Fix 

It is vulnerable because in many ways...the almighty 
dollar has come to resemble a stock.

The distinctive feature of the dot.coms was huge losses 
and a lack of substance. The dot.coms had only ideas - 
funded by huge inflows of capital, which was squandered 
on operating losses.

How like the dollar, actually. Taking the U.S. dollar 
economy as a whole, current account losses are running at 
a record high - more than $1 billion every day, including 
Sundays and holidays. And where is the substance in the 
dollar? At best it is only a piece of paper. At worst, it 
is only an electronic notation. 

The dollar is not only losing money at a record has record levels of debt too. Throughout the 
economy, debts have soared in the last few years. One 
particular form of debt is worth mentioning: financing 
the current account deficit has been accomplished mostly 
by the sale of U.S. corporate and government bonds. 
Foreign holdings of these U.S. dollar liabilities now 
total $2.7 trillion. And net foreign indebtedness has 
roughly doubled - from about $830 billion to more than 
$1.6 trillion since 1995.

Faith in the dollar has been so strong that many of these 
foreign holdings are un-hedged. Yet, in a matter of 
seconds foreigners can hedge their U.S. dollar balances 
with derivative positions. All it would take would be a 
hint of weakness...and the hedges would be put on these 
gargantuan dollar holdings...which would trigger an 
almost overnight collapse of the dollar itself.

Neither book value nor earnings give investors much of a 
handle on the dollar's value. Like dot.coms, the dollar 
trades on faith and hope, not substance. And like 
dot.coms, it is vulnerable to huge shifts in sentiment. 

When Richard Nixon was president and the Grateful Dead 
were at their first peak in popularity an ounce of gold 
would get you only about $35. Seventeen years later, when 
Jerry Garcia was again filling stadiums, the gold price 
had risen to its own cyclical peak of $825 - an increase 
of 2,360%.

Since then, the dollar has shot up like a in slo' 
mo'...up nearly 80% against gold, that is to 
very real terms. 

Dot.coms issued stock just like the Fed issues dollars 
and in exactly the same amounts - as much as they could 
get away with. As long as investors were willing to take 
up the new currencies, all was well. But in March, a 
crisis of confidence developed. Investors began to lose 
faith. Suddenly, the currency - which had been 
tendered for all sorts of debts - was vulnerable. Many of 
these stocks have fallen 90% and more. Many will surely 
sink to the level of a Confederate dollar or an Argentine 

Could a crisis develop in the dollar? Of course it could. 
And it will. In fact, the recent dollar top on May 17th, 
could mark its beginning. 

Best wishes for a sunny, beautiful weekend.

Your correspondent, back on the job in Paris.

Bill Bonner

P.S. Why not hedge against inflation by buying U.S. 
inflation-indexed bonds? Because the debtor is in charge 
of keeping the indexes. We have seen, lately, what 
happens to inflation figures in the imaginative hands at 
the BLS.
About The Daily Reckoning:
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Bill Bonner, recognized internationally as a brilliant writer, entrepreneur
and publisher of The Fleet Street Letter, offers you his daily market
commentary absolutely FREE. For the first time, outsiders are getting a peek into his powerful and profitable investment insights. Bill's practical contrarian advice empowers even average investors to protect their hard-earned wealth and achieve amazing gains.

Bonner writes his email letter from Paris, France, each morning --
describing the wacky, wonderful world of investment, politics and everything remotely related. Irreverent. Sharp. Honest. Thoroughly, unabashedly contrarian. It's also among the fastest growing e-letter on the Internet.  It's a brand new service... but it has a distinguished history..

For nearly 62 year, The Fleet Street Letter, the oldest investment
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invaluable economic and political foresights to savvy investors. Current readers regularly enjoy impressive investment gains even as the market falters. Here's more from his online readers...

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Last modified: April 02, 2001

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